Warren Buffett is Confident About US Banks

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According to Bloomberg, Warren Buffett has guaranteed that the US banks would not get the country in trouble. He also mentioned that he liked US banks because “the capital ratios are huge, the excesses on the asset have been largely cleared out.” With Buffett’s endorsement, investors should feel more confident about US banks. I personally think US banks are attractive investment opportunities at the moment.

Attractive Global Franchise

Citigroup (NYSE: C) just released its FY 2012 results. The revenue grew 3% to $55.8 billion, while the net income was $12.5 billion, up 6% from $11.8 billion in 2011. Citigroup has become a much safer bank with the increasing tangible common equity and Basel I Tier 1 Common Stock. The tangible common equity was $154.5 billion, with the tangible book value of $52.69 per share. The Tier 1 common equity ratio stayed at 12.7%. In the third quarter 2012, Citigroup had nearly $955 billion in deposits, an 11% growth compared to the third quarter last year. The net interest margin was 2.86%. Citigroup is trading at $42.34 per share; the total market capitalization is $124.16 billion. The market is valuing Citigroup at 8.1x forward earnings and 0.7x book value.

Highest Net Interest Margin

Wells Fargo (NYSE: WFC) is Warren Buffett’s favorite long-term bank stock.  He owns more than 422.5 million shares, accounting for more than 8% of the bank and more than 19.4% of Buffett’s portfolio. The net interest margin was 3.56%, the highest among big US banks. Its Tier 1 common equity ratio was 10.12%. Wells Fargo has also managed to increase its core deposits over time, from $864.9 billion in 2011 to $928.8 billion in 2012. In the full year 2012, Wells Fargo has experienced a 19% growth to $18.9 billion in net income. The EPS also rose by 19% to $3.36. Currently, Wells Fargo is trading at $34.68 per share, with a total market capitalization of $181.85 billion. The market is valuing Wells Fargo at 8.8x P/E and 1.3x book value.

Largest Deposit Base

Bank of America (NYSE: BAC) has the largest deposit base among the three US banks. For 4 years, the bank has managed to grow the deposits from $992 billion in 2009 to more than $1 trillion in 2012. The Basel I Tier 1 common capital has reached $155.4 billion, with the Tier I common capital ratio of 11.06%. Full year 2012, the net income came in at 2.76 billion, much higher than 2011 net income of $85 million. The increase in net income was mainly due to the lower provision for credit losses. Indeed, Bank of America's earnings power had been hidden by the large loan loss provision. Gradually, this provision will be released to the bottom line, which would increase the bank's net income.  In the fourth quarter of 2012, net interest margin was the lowest among the three, at 2.35%. Currently, Bank of America is trading at $11.44 per share, with a total market capitalization of $123.25 billion. The market is valuing Bank of America at 9.7x forward earnings and only 0.6x book value. 

Foolish Bottom Line

Investors would feel confident about large US banks with Warren Buffett’s endorsement. Wells Fargo has an efficient operation with the highest interest margin. Citigroup has the top global banking franchise, while Bank of America has the largest deposit base.  Over the long run, all of these three US banking giants will prosper with the improvement of the US economy. 


hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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